* And we will increase the size and reach of CHS Cares, our charitable foundation.

---

Selected Consolidated Financial Data

The following tables set forth certain financial data for each year in the five year period ended December 31, 1997. The information presented as of and for the years ended December 31, 1997, 1996, 1995, 1994 and 1993, is derived from the audited consolidated financial statements of the Company, which statements have been audited by Grant Thornton LLP, independent public accountants. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere herein.
 

	Twelve Months Ended December 31,
	1997	1996	1995	1994	1993
	(In thousands, except per share and other data)
Income Statement Data:
Net sales	$4,756,383	$1,855,540	$936,703	$359,169	$146,408
Cost of goods sold	4,409,714	1,724,432	868,716	333,983	136,968
Gross profit	346,669	131,108	67,987	25,186	9,440
Operating expenses	257,508	102,235	57,188	21,798	9,075
Operating income	89,161	28,873	10,799	3,388	365
Interest income	(11,470)	(3,199)	(1,757)	(250)	(229)
Interest expense	35,618	11,712	6,454	2,070	1,076
Earnings (loss) before income taxes and minority interest in subsidiaries	65,013	20,360	6,102	1,568	(482)
Provision for income taxes	13,988	6,086	1,797	603	241
Minority interest	2,634	2,108	--	--	--
Net earnings (loss)	$48,391	$12,166	$4,305	$965	$(723)
Net earnings (loss) per share--basic	$1.44	$.80	$.41	$.14	$(.21)
Net earnings (loss) per share--diluted	1.32	.78	.37	.14	(.21)
Weighted average shares outstanding--basic	33,527	15,244	10,618	7,039	3,403
Other Data: Number of countries	39	28	15	10	2
Inventory turns	9	10	10	10	23
Days receivable	33	36	35	32	31

	At December 31,
	1997	1996	1995	1994	1993
Balance Sheet Data:
Cash and cash equivalents	$68,806	$35,137	$11,171	$8,368	$603
Working capital (deficit)	278,771	31,506	9,843	14,004	(1,426)
Total assets	1,968,822	861,949	265,804	164,468	29,058
Total debt	371,066	201,259	55,239	23,302	6,949
Shareholders' equity	667,764	104,533	29,892	19,870	1,930

Management's Discussion and Analysis of Financial Condition and Results of Operations

"Forward-Looking" Information

This Annual Report contains certain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which represent the Company's expectations and beliefs, including, but not limited to, statements concerning gross margins, the effect of Karma's results on operating expenses and sales of the Company's products both by regions and on a proforma basis. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company's control, and actual results may differ materially depending on a variety of important factors, including the level of acquisition opportunities available to the Company and the Company's ability to efficiently price and negotiate such acquisitions on a favorable basis, the financial condition of the Company's customers, the failure to properly manage growth and successfully integrate acquired companies and operations, changes in economic conditions, demand for the Company's products and changes in competitive environment.

The Company cautions that the factors described above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements of the Company made by or on behalf of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Overview

CHS distributes microcomputer products, including personal computers, peripherals, networking products and software in 39 countries, primarily in Western Europe, Eastern Europe and Latin America. The Company has pursued and expects to continue to pursue an aggressive strategy of growth through acquisitions of distributors in these and other regions. Together with growth in its existing business, such acquisitions have enabled the Company to significantly increase net sales and achieve strong operating results. From 1993 to 1997, the Company's net sales increased from $146.4 million to $4.8 billion. The Company attributes these increases in sales to its acquisitions, increased consumer demand for the Company's products and an expansion of the range of products offered.

The Company derives all of its operating income and cash flow from its operating subsidiaries, most of which are organized and operated outside the United States. Generally, the Company purchases its inventory with a combination of United States dollars and local currency and sells in local currency. The Company seeks to limit its exposure to the risk of currency fluctuations through hedging. See "--Currency Risk Management."

The following table sets forth acquisitions made by the Company, the service areas of the operations acquired and the dates as of which the results of operations of the acquired company were included in the Company's financial statements during 1995 to 1997.

Subsidiary(1)	Service Area	Date Included in Financial Statements
CHS Nexsys(2)	Colombia	December 1997
CHS Ledakon	Colombia	November 1997
CHS Romak	Ireland	October 1997
CompExpress	Brazil	October 1997
Santech	Norway, Sweden, Denmark	October 1997
Ameritech Argentina(3)	Argentina	August 1997
Ameritech Exports(3)	Latin America	August 1997
Atlantis Skupina(4)	Slovenia	August 1997
Karma	Europe, Middle East and Asia	August 1997
Lars Krull	Denmark, Norway, Sweden	August 1997
CHS Dinexim	Latin America	May 1997
CHS Access and Agora	Czech Republic	May 1997
CHS International High Tech Marketing	Africa	April 1997
Frank & Walter	Germany	January 1997
CHS Estonia	Estonia	January 1997
Infocentro de Chile(4)	Chile	January 1997
CHS Merisel United Kingdom(5)	United Kingdom	October 1996
CHS Merisel France(5)	France	October 1996
CHS Merisel Switzerland(5)	Switzerland	October 1996
CHS Merisel Germany(5)	Germany	October 1996
CHS Merisel Austria(5)	Austria	October 1996
CHS Merisel Latin America(5)	Latin America	October 1996
CHS Merisel Mexico(5)	Mexico	October 1996
CHS Ecuador(4)	Ecuador	June 1996
CHS Russia	Russia	June 1996
CHS Switzerland	Switzerland	April 1996
CHS Peru	Peru	March 1996
CHS Hungary(4)	Hungary	February 1996
CHS Poland	Poland	November 1995
CHS Czechia(6)	Czech Republic	October 1995
CHS Sweden	Sweden	July 1995
CHS Finland	Finland	July 1995
CHS BEK	Latin America	July 1995

(1) The names are those by which the Company refers to its subsidiaries and are not necessarily the legal names of the entities.
(2) The Company owns 65 of this company.
(3) Deemed by the Company to be part of one acquisition.
(4) The Company owns 51 of this company.
(5) Deemed by the Company to be part of one acquisition.
(6) The Company acquired a 16 interest in CHS Czechia in January 1993 and acquired the remaining 84 in October 1995.

Results of Operations

The following table sets forth, for the periods presented, the percentage of net sales represented by certain items in the Company's Consolidated Statements of Earnings:

	Years Ended December 31,
	1997	1996	1995
Net sales	100.0	100.0	100.0
Cost of goods sold	92.7	92.9	92.7
Gross profit	7.3	7.1	7.3
Operating expenses	5.4	5.5	6.1
Operating earnings	1.9	1.6	1.2
Interest income	(.2)	(.1)	(.2)
Interest expense	.7	.6	.7
Earnings before income taxes	1.4	1.1	.7
Income taxes	.3	.3	.2
Minority interest	.1	.1	--
Net earnings	1.0	.7	.5

1997 Compared to 1996

Net Sales. Net sales increased $2.9 billion, or 156.3, from $1.9 billion in 1996 to $4.8 billion in 1997 due principally to acquisitions and, to a lesser extent, internal growth. Of the increase in net sales, newly acquired subsidiaries (including existing CHS companies for the first nine months of 1997 which were integrated with companies acquired from Merisel) contributed $2.5 billion. Net comparable sales of subsidiaries consolidated for both 1996 and 1997 grew $371.3 million or 28.0. This growth is attributed to increased consumer demand for microcomputer products offered by the Company.

Gross Profit. Gross profit increased $215.6 million, or 164.4, from $131.1 million in 1996 to $346.7 million in 1997 due principally to acquisitions and, to a lesser extent, internal growth. Gross profit on a comparable basis for subsidiaries consolidated for both 1996 and 1997 increased $42.4 million, or 48.3. Newly acquired subsidiaries (including existing CHS companies for the first nine months of 1997 which were integrated with companies acquired from Merisel) contributed $173.1 million of increased gross profit.

Gross margin increased from 7.1 in 1996 to 7.3 in 1997. The change in gross margin was due to increased early payment discounts and vendor rebates offset to some extent by lower gross margins of the recently acquired Karma operations. The Company utilized more early payment discount opportunities as a result of the cash generated by its public equity offering in July 1997. Additionally, the Company's growth has resulted in more favorable volume rebates with certain key vendors. The increase in gross margin attributable to early payment discounts (0.2) and volume rebates (1.4) was offset by the fact that the Karma operation has a lower gross margin due to the nature of the products sold. The Company expects that 1998 gross margins will be lower than in 1997 due to the impact of having the Karma operations included in the entire year and due to continued competitive pressures. Although the Company has been achieving higher gross margins (10.5 and 9.3 in 1996 and 1997, respectively) in its Eastern European operations than in other areas, the Company expects gross margins in Eastern Europe to continue to decline due to increased competition and a Company strategy to increase sales through more competitive pricing. The Company expects that the impact on gross profit due to decreased gross margins in this geographic area will be fully offset by increased sales.

Operating Expenses. Operating expenses as a percentage of net sales declined from 5.5 in 1996 to 5.4 in 1997. Included were the expenses of maintaining a minimally utilized warehouse in the Netherlands in 1997 and $1.4 million in Merisel restructuring expenses in 1996. In 1998 the warehouse is expected to be utilized for distribution of universal products (e.g., mass storage and components). The comparative operating expense ratios without these items would have been 5.4 for 1997 and 5.4 for 1996. The Company expects that the inclusion of Karma's results for a full year will result in operating expenses being a lower percentage of net sales based on the lower operating expenses of Karma. Operating expenses for both periods include the results of foreign currency transactions. Such results were a net gain of $1.2 million in 1997 and $1.6 million in 1996.

Net Interest Expense. Net interest expense increased $15.6 million, or 183.7, from $8.5 million in 1996 to $24.1 million in 1997. The increase is directly related to the increase in average loan amounts outstanding.

Income Taxes. Income taxes as a percentage of earnings before income taxes and minority interest in subsidiaries decreased from 29.9 in 1996 to 21.5 in 1997. The change is due to a higher proportion of income earned in jurisdictions with lower tax rates and the use of net operating loss carryforwards, offset, to a certain extent, by losses in subsidiaries with no tax benefit and non deductible goodwill amortization. The Company expects to have an effective tax rate lower than the statutory United States tax rate in 1998 principally due to its ability to use remaining net operating loss carryforwards from certain subsidiaries and the proportion of income expected in jurisdictions with lower tax rates.

1996 Compared to 1995

Net Sales. Net sales increased $918.8 million, or 98.1, from $936.7 million in 1995 to $1.9 billion in 1996 due principally to acquisitions and, to a lesser extent, internal growth. Of the increase in net sales, subsidiaries not included in both 1995 and 1996 contributed $640.7 million. Net comparable sales of subsidiaries consolidated for both 1995 and 1996 grew $278.1 million or 29.7. This growth is attributed to increased consumer demand for microcomputer products offered by the Company and the expansion of sales by the Company's subsidiaries to include a full range of products.

Gross Profit. Gross profit increased $63.1 million, or 92.8, from $68.0 million in 1995 to $131.1 million in 1996 due principally to acquisitions and, to a lesser extent, internal growth. Gross profit on a comparable basis for subsidiaries consolidated for both 1995 and 1996 increased $13.6 million, or 20.0. Subsidiaries not included in both 1995 and 1996 contributed $49.5 million of gross profit.

Gross margin decreased from 7.3 in 1995 to 7.1 in 1996. The decrease was due to lower gross margins from subsidiaries located in Western Europe, particularly those operations acquired from Merisel, which, as a result of high volumes of sales by those entities, had a significant impact on the Company's gross margin as a whole. The Company attributes the decrease in gross margins to competitive pressures in this region, especially in Germany. The Company's subsidiaries in Germany had the lowest gross margins of all its European subsidiaries in 1996. The Company expects that overall gross margin may continue to decline in 1997 due to continued competitive pricing pressures and the fact that the gross margins of the acquired Merisel companies have been generally lower than that of the Company and will be included in the consolidation for the full year. In addition, the acquisition of Frank & Walter, which operates in Germany, where gross margins are generally lower, will also impact overall gross margin. The gross margin of the combined Merisel companies for the nine months ended September 30, 1996 was 7.0.

Operating Expenses. Operating expenses as a percentage of net sales declined from 6.1 in 1995 to 5.5 in 1996. The decline was due to efficiencies gained through increased sales volume and the Company's efforts to control costs. The reduction was achieved even though a provision of $1.4 million was made for restructuring costs incurred by CHS (consisting of severance costs for CHS employees, write-off of CHS leasehold improvements and lease termination costs of CHS closed facilities) to implement consolidation in markets in which a CHS company previously existed and a company was acquired from Merisel. The operating expense ratio without such charge would have been 5.4 for the year.

Net Interest Expense. Net interest expense increased $3.8 million, or 81.2, from $4.7 million in 1995 to $8.5 million in 1996. The increase is directly related to the increase in average loan amounts outstanding.

Income Taxes. Income taxes as a percentage of earnings before income taxes and minority interest in subsidiaries increased slightly from 29.4 in 1995 to 29.9 in 1996. Management does not believe this change is significant. The difference between this tax rate and the statutory United States tax rate is due to the utilization of net operating loss carryforwards and lower foreign tax rates, offset to some extent by losses in subsidiaries with no tax benefit and non-deductible goodwill amortization.

Seasonality

The Company typically experiences variability in its net sales and net income on a quarterly basis as a result of many factors, including the condition of the microcomputer industry in general, shifts in demand for software and hardware products and industry announcements of new products or upgrades. Sales in Europe in the first and fourth quarters of each year are typically higher than in the second and third quarters. In Latin America, sales in the third and fourth quarters of each year are typically higher than in the first and second quarters.

Liquidity and Capital Resources

Net cash of $248.5 million and $99.1 million was used in operating activities in the years ended December 31, 1997 and 1996, respectively. In both years, cash was used principally due to increases in inventories, trade accounts receivable and amounts due from affiliates, offset in 1996 by increases in accounts payable. In 1997, cash was also used to lower accounts payable and accrued expenses. Net cash used in investing activities in 1997 and 1996 included $19.5 million and $11.6 million, respectively, related to fixed asset additions. In addition, $201.5 million and $26.9 million were used in acquisitions during the years ended December 31, 1997 and 1996, respectively. Net cash of $507.2 million and $163.3 million was provided by financing activities in the years ended December 31, 1997 and 1996, respectively, due principally to proceeds of equity public offerings totalling $428.2 million in 1997 and $50.6 million in 1996. Furthermore, net borrowings from banks totalled $74.7 million and $112.5 million in the years ended December 31, 1997 and 1996, respectively.

Certain of the Company's United States based subsidiaries are parties to a Loan and Security Agreement providing for revolving credit advances and the issuance of letters of credit against eligible accounts receivable and inventory up to a maximum of $60 million. Amounts outstanding bear interest, at the election of the borrowers, at either a variable market rate based on the prime rate of the lender or LIBOR. The agreement limits the ability of the borrowers to pay dividends to the Company. The agreement matures in October 1999 and is secured by a lien on essentially all of the borrowers' assets. The agreement contains certain restrictive covenants. During November and December 1997, the borrowers were in violation of requirements to deposit receipts in specified accounts. The lender has waived these violations. The Company has guaranteed this indebtedness.

The Company's subsidiaries typically enter into revolving credit agreements with financial institutions in their countries of operations. At December 31, 1997, the aggregate amount available under these agreements was $445.4 million and $348.3 million was then outstanding. Such agreements are usually for a term of one year and are secured by the receivables of the borrower. The weighted average interest rate at December 31, 1997 was 7.3. The Company typically guarantees these loans. The Company has also guaranteed the obligations of certain of its subsidiaries to manufacturers.

The Company derives all of its operating income and cash flow from its subsidiaries and relies on payments from, and intercompany borrowings with, its subsidiaries to generate the funds necessary to meet its obligations. In certain countries, exchange controls may limit the ability of the Company's subsidiaries to make payments to the Company. Restrictions in financing or credit arrangements may also limit access to such earnings. Certain of the Company's subsidiaries are parties to financing agreements that limit the ability of such subsidiaries to make payments to the Company. In the year ended December 31, 1997, the contribution of such subsidiaries to the Company's consolidated EBITDA was 16.6. Claims of creditors of the Company's subsidiaries will generally have priority as to the assets and cash flow of such subsidiaries over the claims of the Company or its creditors. See Note F to the Consolidated Financial Statements.

The Company has completed a risk assessment of the ability of its information systems to operate in light of the "year 2000 problem." Based on the assessment, the Company has developed an action plan, which principally consists of replacing existing non-compliant systems with new systems. The Company believes it is feasible to acquire such new systems before the year 2000 and that the cost of such systems are within its capital cost budget and financing capabilities.

The Company's principal need for additional cash in 1998 will be for the purchase of additional inventory to support growth and to take greater advantage of available cash discounts offered by certain of the Company's vendors for early payment and to pay amounts due to sellers of businesses. The Company anticipates funding this cash requirement partially through an offering of $200 million of Senior Notes due 2005 ("Note Offering"), its subsidiaries' existing bank credit lines and through additional credit facilities, but there can be no assurance that financing will be available on terms acceptable to the Company. The unavailability of such financing could adversely affect the growth of the Company. The Notes will be sold in a Rule 144A and Regulation S private offering.

Inflation

The Company operates in certain countries that have experienced high rates of inflation and hyperinflation. However, inflation did not have any meaningful impact on the Company's results of operations during the year ended December 31, 1997 nor during the three-year period ended December 31, 1997, and the Company does not expect that it will have a material impact during 1998.

Asset Management

Inventory. The Company's goal is to achieve high inventory turns and maintain a low number of SKUs and thereby reduce the Company's working capital requirements and improve return on equity. The Company's strategy to achieve this goal is to both manage its inventory effectively and achieve high order fill rates.

To reduce the risk of loss to the Company due to vendor price reductions and slow moving or obsolete inventory, the Company's contracts with its vendors generally provide price protection and stock rotation privileges, subject to certain limitations. Price protection allows the Company to offset the accounts payable owed to a particular vendor if such vendor reduces the price of products the Company has purchased within a specified period of time and which remain in inventory. Stock rotation permits the Company to return to the vendor for full credit, with an offsetting purchase order for new products, predetermined amounts of inventory purchased within a specified period of time. Such credit is typically used to offset existing invoices due without incurring re-stocking fees.

Accounts Receivable. The Company manages its accounts receivable to balance the needs of its customers to purchase on credit with its desire to minimize its credit losses. Bad debt expense as a percentage of the Company's net sales for each of the years ended 1996 and 1997 was 0.2. The Company's credit losses have been minimized by its extensive credit approval process and the use of credit insurance and factoring by its Western European subsidiaries. In its sales to customers in Latin America, the Company often receives post-dated checks at the time of sale. Customers who qualify for credit are typically granted payment terms appropriate to the customs of each country.

Currency Risk Management

Functional Currency. The Company's functional currency, as defined by Statement of Financial Accounting Standards ("SFAS") No. 52, is the United States dollar. Most of the Company's subsidiaries use their respective local currencies as their functional currency and translate assets and liabilities using the exchange rates in effect at the balance sheet date and results of operations using the average exchange rates prevailing during the year. Translation effects are reflected in the cumulative foreign currency translation adjustment in equity. The Company's exposure under these translation rules, which is unhedged, may affect the carrying value of its foreign net assets and therefore its equity and net tangible book value, but not its net income or cash flow. Exchange differences arising from transactions and balances in currencies other than the functional currency are recorded as expense or income in the subsidiaries and the Company and affect the Statements of Earnings.

Hedging and Currency Management Activities. The Company attempts to limit its risk of currency fluctuations through hedging where possible. In the year ended December 31, 1997, a significant amount of the purchases of products by the Company were made in United States dollars and approximately 88 of Company sales were made in currencies other than the United States dollar. The primary currencies in which sales were made were the German mark (29 of sales), the French franc (10) and the British pound (9). At December 31, 1997, approximately $271.6 million of accounts payable were attributable to foreign currency liabilities denominated in currencies other than the subsidiaries' functional currencies. Of these, $229.3 million were denominated in United States dollars and $26.2 million were denominated in German marks. Approximately 39 of these liabilities were unhedged. The most significant unhedged amounts were recorded in Czechian korunas ($24.7 million), Hong Kong dollars ($21.7 million), Polish zlotys ($14.2 million), Argentine pesos ($13.6 million), and Mexican pesos ($10.6 million).

CHS Finance, a wholly owned subsidiary of the Company, engages in central treasury functions including hedging activities related to foreign currency for the Company and short-term working capital loans to the Company's subsidiaries to enable them to take advantage of early payment discounts offered by certain vendors. These loans are denominated in the functional currency of the borrowing subsidiary or United States dollars. Generally, CHS Finance hedges its receivables denominated in currencies other than its functional currency, the Swiss franc. It attempts to limit the amount of unhedged receivables to an amount which approximates the total unhedged liabilities. The Company intends to review this policy periodically and may modify it in the future.

Through both hedging activities coordinated by CHS Finance and subsidiary hedging activities, the Company makes forward purchases of United States dollars in an attempt to hedge certain European currencies and reduce exposure to fluctuations in exchange rates. Additionally, in certain countries in Eastern Europe and in Latin America where it is not practical to make forward purchases, to minimize exposure to currency devaluations, the Company has adopted a policy of attempting to match accounts receivable with accounts payable and to limit holdings of local currencies. In these countries, the Company attempts to sell products at the United States dollar equivalent rate. Factors which affect exchange rates are varied and no reliable prediction methods are available for definitively determining future exchange rates. In general, countries make an effort to maintain stability in rates for trade purposes. There can be no assurance that these asset management programs will be effective in limiting the Company's exposure to these risks.

New Accounting Pronouncements

The Financial Accounting Standards Board issued SFAS No. 130, "Comprehensive Income", in June 1997. SFAS No. 130 requires that changes in the amounts of items that bypass the income statement and are only reported within a balance in shareholders' equity be included in a separate financial statement. The only item that qualifies as a component of comprehensive income currently bypassing the statement of income is the foreign currency translation adjustment. SFAS No. 130 becomes effective for fiscal years beginning after December 15, 1997. The Company believes that the adoption of this standard will not have an effect on the Company's financial position or result of operations.

Market for the Registrant's Common Equity and Related Stockholder Matters

The following table sets forth for the periods indicated the high and low closing sales prices of the Company's Common Stock (symbol: CHSE) from January 1, 1996 through June 6, 1996 on the Nasdaq Small-Cap Market and thereafter on the Nasdaq National Market. The Company effected a one-for-two reverse stock split on March 14, 1996. On September 15, 1997, the Company effected a three-for-two forward split for all shareholders of record as of September 2, 1997. All prior amounts have been adjusted to reflect the effects of such splits. Such prices are based on inter-dealer bid and asked prices, without markup, markdown, commissions, or adjustments and may not represent actual transactions.

Fiscal Year	Period	Historic Prices
		High	Low
1997	First Quarter	$16.08	$10.33
	Second Quarter	17.75	11.50
	Third Quarter	29.75	17.21
	Fourth Quarter	30.75	14.75
1996	First Quarter	$11.00	$5.33
	Second Quarter	12.33	6.58
	Third Quarter	9.67	6.67
	Fourth Quarter	13.00	6.83

The last reported sale price of the Common Stock as reported on the Nasdaq National Market on March 23, 1998 was $18.25 per share. As of March 23, 1998, the outstanding Common Stock was held of record by 343 shareholders. The Company believes that it has in excess of 400 beneficial owners.

The Company has never paid cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future, but intends instead to retain any future earnings for reinvestment in its business. Any future determination to pay cash dividends will be at the discretion of the Board of Directors and will be dependent upon the Company's financial condition, results of operations, capital requirements and such other factors as the Board of Directors deems relevant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."

Consolidated Balance Sheets

	December 31,
	1997	1996
ASSETS
CURRENT ASSETS:
Cash	$68,806	$35,137
Accounts receivable:
Trade, less allowance for doubtful accounts of $18,347 in 1997 and $14,830 in 1996	659,757	340,098
Affiliates	24,604	3,241
	684,361	343,339
Inventories	693,503	321,770
Prepaid expenses and other current assets	65,255	39,374
Total current assets	1,511,925	739,620
PROPERTY AND EQUIPMENT, NET	61,468	30,947
COST IN EXCESS OF ASSETS ACQUIRED, NET	381,830	78,780
OTHER ASSETS	13,599	12,602
	$1,968,822	$861,949
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable	$309,510	$155,932
Accounts payable, trade	771,535	452,569
Accrued liabilities	83,309	44,873
Amounts due to sellers under acquisition agreements	54,866	49,200
Income taxes payable	12,711	5,120
Deferred income taxes	1,223	420
Total current liabilities	1,233,154	708,114
LONG TERM DEBT	61,556	45,327
MINORITY INTEREST	6,348	3,975
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 5,000,000 shares; 0 shares outstanding	--	--
Common stock, authorized 100,000,000 shares at $.001 par value; oustanding 48,910,999 shares at December 31, 1997 and 18,600,576 shares at December 31, 1996	49	19
Additional paid-in capital	621,021	92,843
Retained earnings	65,115	16,724
Cumulative foreign currency translation adjustment	(18,421)	(5,053)
TOTAL SHAREHOLDERS' EQUITY	667,764	104,533
	$1,968,822	$861,949

The accompanying notes are an integral part of these statements.
 

Consolidated Statements of Earnings

 

	Year Ended December 31,
	1997	1996	1995
Net sales (including sales to affiliates of $21,063 in 1995)	$4,756,383	$1,855,540	$936,703
Cost of goods sold	4,409,714	1,724,432	868,716
Gross profit	346,669	131,108	67,987
Operating expenses	257,508	102,235	57,188
Operating income	89,161	28,873	10,799
Other (income) expense:
Interest income	(11,470)	(3,199)	(1,757)
Interest expense	35,618	11,712	6,454
	24,148	8,513	4,697
Earnings before income taxes and minority interest in subsidiaries	65,013	20,360	6,102
Income taxes	13,988	6,086	1,797
Minority interest in subsidiaries	2,634	2,108	--
Net earnings	$48,391	$12,166	$4,305
Net earnings per common share--basic	$1.44	$.80	$.41
Net earnings per common share--diluted	$1.32	$.78	$.37

The accompanying notes are an integral part of these statements.
 

Consolidated Statements of Shareholders' Equity

	Three Years Ended December 31, 1997
	Common Stock	Additional Paid-In Capital	Retained Earnings	Deferred Compensation	Cumulative Foreign Currency Translation Adjustment	Total
Balance at January 1, 1995	$7	$19,625	$253	$(138)	$123	$19,870
Adjustment 3 for 2 forward stock split	3	(3)	--	--	--	--
Deferred compensation recognized	--	--	--	138	--	138
Issuance of common stock in acquisitions	1	5,351	--	--	--	5,352
Net earnings	--	--	4,305	--	--	4,305
Foreign currency translation adjustment	--	--	--	--	227	227
Balance at December 31, 1995	11	24,973	4,558	--	350	29,892
Common stock or other consideration issued in acquisitions (Note B)	--	16,982	--	--	--	16,982
Common stock issued in public offering	7	50,607	--	--	--	50,614
Stock options exercised	1	281	--	--	--	282
Net earnings	--	--	12,166	--	--	12,166
Foreign currency translation adjustment	--	--	--	--	(5,403)	(5,403)
Balance at December 31, 1996	19	92,843	16,724	--	(5,053)	104,533
Common stock issued in acquisitions (Note B)	8	95,720	--	--	--	95,728
Common stock issued in public offering	21	428,195	--	--	--	428,216
Stock options exercised	1	4,263	--	--	--	4,264
Net earnings	--	--	48,391	--	--	48,391
Foreign currency translation adjustment	--	--	--	--	(13,368)	(13,368)
Balance at December 31, 1997	$49	$621,021	$65,115	$--	$(18,421)	$667,764

The accompanying notes are an integral part of these statements.
 

Consolidated Statements of Cash Flows

	Year Ended December 31,
	1997	1996	1995
Increase in cash and cash equivalents:
Cash flows from operating activities:
Net earnings	$48,391	$12,166	$4,305
Adjustments to reconcile net earnings to net cash (used in) operating activities:
Depreciation and amortization	21,789	6,632	2,456
Deferred compensation amortized	--	--	148
Minority interest in net earnings	2,634	2,108	--
Changes in assets and liabilities excluding effects of acquisitions:
Accounts receivable--trade, net	(121,163)	(118,694)	(37,724)
Accounts receivable--affiliates, net	(21,363)	(2,398)	(12,285)
Inventories	(139,923)	(129,357)	(32,204)
Prepaid expenses and other current assets	5,404	(22,345)	(1,742)
Accounts payable, trade	(10,773)	173,244	51,818
Accrued liabilities and income taxes	(33,511)	(20,481)	3,175
Net cash (used in) operating activities	(248,515)	(99,125)	(22,053)
Cash flows from investing activities:
Purchase of fixed assets	(19,511)	(11,624)	(6,866)
Cash provided from (used in) acquisitions, net	(201,517)	(26,876)	1,317
Net cash (used in) investing activities	(221,028)	(38,500)	(5,549)
Cash flows from financing activities:
Proceeds from public offering	428,216	50,614	--
Proceeds from stock options exercised	4,263	281	--
Net borrowing from banks	74,699	112,453	29,855
Net cash provided by financing activities	507,178	163,348	29,855
Effect of exchange rate changes on cash	(3,966)	(1,757)	550
INCREASE IN CASH AND CASH EQUIVALENTS	33,669	23,966	2,803
Cash at beginning of year	35,137	11,171	8,368
Cash at end of year	$68,806	$35,137	$11,171
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$30,454	$10,064	$4,944
Income taxes	$10,585	$3,892	$1,753
Non cash investing and financing activities: These statements of cash flows do not include non-cash investing and financing transactions associated with the common stock issued for various acquisitions. The components of the transactions in each year are as follows:
Fair value of assets acquired including cash acquired	$689,550	$14,691	$19,216
Less: Common stock or other consideration issued	232,748	3,278	7,152
Liabilities assumed	$456,802	$11,413	$12,064

In 1996, $13.7 million was credited to additional paid-in capital representing additional consideration paid by Comtrad, Inc. under acquisition agreements for subsidiaries now held by the Company. In 1995, a $5.2 million reduction in receivable from affiliate was charged to additional paid-in capital.
The accompanying notes are an integral part of these statements.

Notes to the Consolidated Financial Statements

Note A--Summary of Accounting Policies

1. Nature of Operations

The Company is an international distributor of computer equipment, peripherals and software. The products are sold, principally to resellers, primarily in Western Europe, South America and Eastern Europe.

2. Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, wholly owned and majority owned. All significant intercompany accounts and transactions have been eliminated in consolidation.

3. Foreign Currency Translation

For purposes of preparation of its financial statements, the Company uses local currencies as the functional currencies except in highly inflationary countries. For subsidiaries where the local currency is the functional currency, assets and liabilities are translated into United States dollars at the exchange rate in effect at the end of the year. Revenues and expenses of these subsidiaries are translated at the average exchange rate during the year. The aggregate effect of translating the financial statements of foreign subsidiaries is included in a separate component of shareholders' equity entitled cumulative foreign currency translation adjustment. In the normal course of business, the Company advances funds to certain of its foreign subsidiaries, which are not expected to be repaid in the foreseeable future. Translation adjustments resulting from these advances are included in cumulative foreign currency translation adjustment. For entities in highly inflationary countries, the U.S. dollar is considered the functional currency and a combination of current and historical rates are used in translating assets, liabilities, revenues and expenses. The related exchange adjustments are included in earnings.

4. Cash Equivalents

For the purpose of the consolidated statements of cash flows, the Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

5. Concentration of Credit Risk

The Company's credit risk on trade receivables is diversified over a wide geographic area and many customers. The largest customer accounts for less than 1 of sales. The Company performs ongoing credit evaluations of its customers. In South America, the Company obtains guarantees from its customers in some cases. The Company uses credit insurance in several locations (covering $281 million in receivables at December 31, 1997) and factoring without recourse in other locations to mitigate risk. The Company provides for estimated credit losses at time of sale based upon factors surrounding the credit risk of specific customers, historical trends and other information.

6. Inventories

Inventories, consisting of finished products, are stated at the lower of cost or market, with cost being determined principally by current replacement cost, which approximates the first-in first-out method.

7. Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives. Leasehold improvements and capital leases are amortized over the lives of respective leases or the service lives of the improvements whichever is shorter.

The straight-line and accelerated methods of depreciation are followed for financial reporting purposes. The useful lives are as follows:

	Years
Buildings	30-50
Leasehold improvements	3-7
Computer equipment	2-5
Office equipment and furniture	3-10

Expenditures for renewals and improvements that significantly extend the useful life of an asset are capitalized. The costs of software used in business operations are capitalized and amortized over their expected useful lives. Expenditures for maintenance and repairs are charged to operations when incurred. When assets are sold or retired, the cost of the asset and the related accumulated depreciation are removed from the accounts and any gain or loss is recognized at such time.

8. Income Taxes

The Company utilizes the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. Under the liability method specified by SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the current enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities.

The Company intends to invest the undistributed earnings of substantially all of its foreign subsidiaries indefinitely. At December 31, 1997 and 1996, the cumulative amount of undistributed earnings on which the Company has not recognized United States income taxes was approximately $53 million and $13 million, respectively. However, it is anticipated that United States income taxes on such amounts would be partially offset by available foreign income tax credits.

9. Revenue Recognition

The Company recognizes sales upon shipment, as there is no significant post-sale obligation and collectibility is reasonably assured. Income from vendor rebates, discounts, and cooperative advertising is recognized when earned, as a reduction of the cost of inventory sold or as a reduction of operating expenses.

10. Cost in Excess of Assets Acquired, Net

The cost in excess of assets acquired is being amortized to earnings over a 20 year period on a straight-line basis. The Company evaluates its goodwill in accordance with SFAS No. 121, "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," to determine potential impairment by comparing the carrying value to undiscounted future cash flows of the related assets. The Company modifies or adjusts the value of a subsidiary's goodwill if an impairment is indicated by the difference between the undiscounted cash flows and the carrying value. The Company considers a history of operating losses to be a primary indicator of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are largely independent of cash flows of other groups of assets. Assets are generally grouped at the country level of operations. The Company deems an asset to be impaired if a forecast of undiscounted future operating cash flows directly related to the asset, including disposal value if any, is less than its carrying amount. All of the Company's goodwill is identified with the assets acquired and falls under the scope of SFAS No. 121. Accumulated amortization was $10.8 million and $2.2 million at December 31, 1997 and 1996, respectively.

11. Earnings per Common Share

The Company has adopted SFAS No. 128, Earnings Per Share. In accordance with this statement, basic earnings per share is computed by dividing net earnings by the weighted averaged number of common shares outstanding. Diluted earning per share includes the dilution caused by common stock options and the shares that would be issued in existing earn outs based upon applying the earn out multiple to annualized actual earnings and dividing by the market price at period end. The weighted average number of shares for basic earnings per share was 33,527,256, 15,243,672, and 10,618,183 in 1997, 1996, and 1995, respectively. The weighted average number of shares used in the diluted computation was 36,592,368, 15,656,178, and 11,521,859 in 1997, 1996, and 1995, respectively. All share and per share information has been restated for a three to two stock split effective in September 1997.

The following table illustrates the reconciliation of the income and weighted average number of shares of the basic and diluted earnings per share computations (amounts in thousands, except per share mounts):

	Year Ended December 31, 1997
	Net Earnings	Weighted Average Shares	Per Share Amount
Net earnings	$48,391	--	--
Net earnings per share--basic	48,391	33,527	$1.44
Effect of dilutive shares:
Stock options outstanding	--	1,434	--
Earnout contingencies	--	1,631	--
Net earnings per share--diluted	$48,391	36,592	$1.32

 

	Year Ended December 31, 1996
	Net Earnings	Weighted Average Shares	Per Share Amount
Net earnings	$12,166	--	--
Net earnings per share--basic	12,166	15,244	$.80
Effect of dilutive shares:
Stock options outstanding	--	412	--
Net earnings per share--diluted	$12,166	15,656	$.78

 

	Year Ended December 31, 1995
	Net Earnings	Weighted Average Shares	Per Share Amounts
Net earnings	$4,305	--	--
Net earnings per share--basic	4,305	10,618	$.41
Effect of dilutive shares:
Stock options outstanding	--	904	--
Net earnings per share--diluted	$4,305	11,522	$.37

12. Stock Options

Options granted under the Company's 1994 Stock Option Plan, the 1996 and 1997 Chief Executive Officer stock option plans and the 1996 Directors and Officers stock option plan are accounted for under APB Opinion 25, Accounting for Stock Issued to Employees. As to grants requiring shareholder approval, the Company considers the date of grant to be the date of action by the Board of Directors when, on such date, shareholder approval is deemed to be perfunctory.

13. Use of Estimates

In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.

Note B--Acquisitions

In 1997 the Company made 15 acquisitions, of which three were significant. On October 3, 1997, the Company completed the acquisition of Santech Micro Group ASA ("Santech"), pursuant to which it acquired 97.4 of the capital stock of Santech for approximately $125 million. The Company expects to acquire the remainder of the shares at the same per share price. Santech is the largest distributor of microcomputer products in Scandinavia with operations in Norway, Sweden and Denmark and had revenues of $718 million in 1996. Santech distributes the products of the same vendors as other subsidiaries of the Company. The acquisition of Santech has been accounted for under the purchase method and, accordingly the results of Santech have been included in the consolidated operating results since the date of acquisition. The acquisition of Santech resulted in the recognition of $109.1 million of goodwill.

Santech's operating results during 1996 and 1997 were adversely impacted as a result of restructuring its operations after a July 1996 merger. Operating results were also impacted adversely by the implementation of a new computer system in the first six months of 1997. The adverse impact included costs associated with reduction in the number of its product lines and the number of employees from 450 to 320. The Company believes that these factors have been addressed and that these issues should not have a material adverse impact on Santech's or the Company's future operations.

On August 4, 1997, the Company completed the acquisition of Karma International S.A. ("Karma"). Karma is a distributor of personal computer components to over 10,000 customers in Europe, the Middle East and Asia. The purchase price for Karma was $160 million and was funded through (i) $74 million in cash and (ii) 4,813,432 shares of unregistered Common Stock. Karma's product line includes mass storage products, CPUs, memory chips, motherboards, sound, video and other cards and monitors. Karma operates in 18 countries through 28 offices in Europe, the Middle East Asisa. Karma had net sales of approximately $700 million in 1996. Karma existing management continues to operate Karma as a subsidiary of CHS. One representative of Karma was elected to the Board of Directors of CHS with an additional member to be nominated in 1998. The acquisition of Karma has been accounted for under the purchase method and, accordingly the results of Karma have been included in the consolidated operating results since the date of acquisition. The acquisition of Karma resulted in the recognition of $123.0 million of goodwill.

On March 20, 1997, the Company completed the acquisition of Frank & Walter Computer GmbH ("Frank & Walter") for 3,300,000 unregistered shares of Common Stock. Frank & Walter had net sales of approximately $686 million in 1996. The results of operations of Frank & Walter have been included in the Company's financial statements since January 1, 1997. The Company believes that Frank & Walter was, at the time of acquisition, the fourth largest computer distributor in Germany with over 10,000 active dealers. As a result of this acquisition, the Company believes it is the largest distributor of microcomputer products in Germany. Carsten Frank, the founder of Frank & Walter, became a director of CHS and initially became the CHS executive vice president responsible for the Company's European operations. The acquisition of Frank & Walter has been accounted for under the purchase method and, accordingly the results of Frank & Walter have been included in the consolidated operating results since the date of acquisition. The amounts preliminarily allocated to assets acquired and liabilities assumed resulted in a recognition of $27.6 million of goodwill. During 1997 an appraisal of certain acquired assets was performed. As a result of the appraisal, goodwill was decreased by $1.0 million.

The Company completed other acquisitions during 1997 which were considered not to be significant. Such acquisitions have been accounted for under the purchase method and accordingly, the results of such acquired entities have been included in the consolidated operating results since their acquisition dates.

In 1996 the Company acquired eighteen companies in as many countries. The largest acquisition was of seven companies comprising the European and Latin American businesses of a competitor, Merisel, Inc. ("Merisel"). These seven companies were acquired for cash and debt assumptions. The total consideration paid was approximately $148 million consisting of $30 million of cash and $118 million of debt assumed or refinanced. The Company financed the acquisition primarily through borrowing or factoring at each subsidiary acquired. Approximately $11 million was owed to Merisel at December 31, 1996. The acquisition has been accounted for as a purchase, effective as of September 30, 1996. Therefore, operations of these companies are included only in the 1996 fourth quarter. The cost of the acquisition has been allocated to the assets acquired based on their fair values. This initially resulted in approximately $10.5 million of goodwill. In the second and third quarters of 1997, certain reserves initially established were determined not to be required, resulting in a reduction of goodwill to $4.6 million.

The Company has now completed the consolidation of the former Merisel and CHS operations in the five countries where each had operations. The Company accrued approximately $12.8 million for the consolidation activities. The reserve consists of severance costs--$.4 million, lease termination--$4.1 million, writeoff of leasehold improvements and computer systems--$4.9 million, and accounts receivable and other costs--$3.4 million. Through December 31, 1997, $8.8 million has been charged against this reserve. The Company's original intent to dispose of the former Merisel warehouse located in the Netherlands has been revised as a result of the Karma acquisition and the Company now intends to relocate Karma's existing warehouse in the Netherlands to the former Merisel warehouse.

In June 1996, the Company acquired 100 of an unaffiliated company in Russia for consideration based on a multiple of that company's net income in 1996. The acquisition was initially recorded at no consideration, which approximated the value of net assets acquired. Subsequently, the agreement was modified to measure the value of the Company based 50 on 1996 results and 50 on 1997 results. The 1996 portion is payable in cash and was paid in 1997 and the 1997 portion is payable in cash or stock at the seller's option. In 1997 and 1996, $25.3 million and $20.6 million, respectively, was recorded as purchase price and goodwill.

In April 1996, the Company acquired 100 of an unaffiliated company in Switzerland for consideration based on the acquired company's results in 1996. The consideration was based on a multiple of 1996 net earnings but not less than $1.7 million. The acquisition was initially recorded at $1.7 million resulting in no goodwill. Subsequently, the agreement was modified to base the price on results through September 30, 1996. In the 1996 fourth quarter, 274,855 shares of common stock were issued and goodwill of $870,000 was recorded.

In March 1996, the Company acquired six companies from Comtrad, Inc., an affiliate, for a reduction of indebtedness of $7.8 million. These acquisitions have been accounted for as an exchange between entities under common control in a manner similar to a pooling of interests. Accordingly, these acquisitions have been included in the accompanying financial statements from the date acquired by Comtrad. The companies in Bulgaria, Croatia, Lithuania and Romania were started by Comtrad in 1993 and 1994 for a minimal investment and have insignificant operations. They are treated as if Comtrad acquired them on December 31, 1994. Sixty-five percent of a company in Slovakia was acquired in early 1994 for a minimal investment and 1994 results were insignificant. The remaining 35 was acquired by Comtrad for a contingent payment in shares of common stock to be based on 1996 results. This acquisition has been recorded as of December 31, 1994 based on the cost of the 65 interest acquired with the remaining cost to be recorded as goodwill when known. The contingent amount, which was insignificant, was recorded in 1997. Comtrad acquired the Brazil company in November 1994 for Comtrad common shares valued at $762,000. The acquisition was recorded by the Company as of December 31, 1994 at this value, resulting in goodwill of $2.5 million. An additional amount of $240,000 was paid by Comtrad in 1996 to complete its acquisition of this company, which had the effect of increasing goodwill to $2.8 million.

In February 1996, the Company acquired 51 of an unaffiliated company in Hungary for consideration based on 51 of the book value of equity at December 31, 1996 plus a multiple of 51 of 1996 net earnings. Based on 1996 results, the purchase price was fixed at $17.6 million resulting in goodwill of $15.8 million. The sellers elected to receive the proceeds in cash rather than stock. In the second quarter of 1997 the agreement was modified to measure the value of the company based 75 on 1996 results and 25 on 1997 results. The 1996 amount was paid in 1997. As a result, goodwill in 1996 was reduced by $3.8 million. The 1997 amount, estimated at $5.6 million, was recorded in 1997 and increased goodwill.

In 1995, the Company acquired nine companies in as many countries. Eight of these were acquired from Comtrad Holdings, Inc. ("CHI") or Comtrad (a wholly owned subsidiary of CHI) and have been accounted for as an exchange between entities under common control in a manner similar to a pooling of interests. Accordingly, these acquisitions have been included in the accompanying financial statements from the date acquired by Comtrad or CHI. The acquisition of the company in the Czech Republic was partially (16) from Comtrad and partially from an individual. The portion from Comtrad was valued at Comtrad's basis of $758,000. The portion purchased from the unrelated individual has been accounted for as a purchase. Results of the remaining 84 of the Czech Republic company have been included in the accompanying financial statements from October 1, 1995.

Information about the pooled acquisitions is shown below:
 
 

Company	Service Area	Consideration	CHS Acquisition Date	Comtrad or CHI Acquisition Date
CHS England	United Kingdom	2,625,000  shares	April 1995	September 1994
CHS France	France		April 1995	September 1994
CHS Belgium	Belgium		April 1995	September 1994
CHS Portugal	Portugal		April 1995	January 1993
CHS BEK	South America	431,250 shares	October 1995	July 1995
CHS Czechia (16)	Czech Republic	138,000 shares	October 1995	January 1993
CHS Finland	Finland	$2,300,000	December 1995	July 1995
CHS Sweden	Sweden	$2,400,000	December 1995	July 1995
CHS ABC Data	Poland	$2,300,000	December 1995	November 1995

The Company acquired 84 of the Czech Republic company from an individual by issuing 483,000 shares which were valued at their market value of $3,246,000. This produced goodwill of $2.4 million.

The following represents the unaudited pro forma results of operations assuming all significant 1997 and 1996 acquisitions had taken place on January 1, 1996 (amounts in thousands, except per share amounts):

	Year Ended December 31,
	1997	1996
	(in thousands, except per share data)
Sales	$5,708,679	$4,996,399
Net earnings	19,553	2,295
Net earnings per share--basic	$.47	$.07
Net earnings per share--diluted	$.44	$.07

Pro forma adjustments have been made to eliminate non-recurring loss in the operations acquired from Merisel and to add goodwill amortization and interest expense on the amounts payable to selling stockholders at 7.5. The pro forma information is not necessarily indicative of the actual results of operation that would have occurred had the acquisitions taken place on January 1, 1996, or of results which may occur in the future.

Note C--Allowance for Doubtful Accounts

	Year Ended December 31,
	1997	1996	1995
	(in thousands)
Allowance for doubtful accounts:
Beginning balance	$14,830	$4,388	$3,358
Provision for bad debt	11,636	3,412	3,035
Write-offs	(14,162)	(3,775)	(2,161)
Acquired through acquisition	6,043	10,805	156
Ending balance	$18,347	$14,830	$4,388

Note D--Property and Equipment

	December 31,
	1997	1996
	(in thousands)
Land and buildings	$19,358	$3,167
Furniture and fixtures	22,047	15,126
Leasehold improvements	7,330	4,914
Computers and office equipment	43,470	25,000
Vehicles and other	3,497	5,414
	95,702	53,621
Less accumulated depreciation and amortization	34,234	22,674
	$61,468	$30,947

Note E--Income Taxes

The components of earnings before income taxes and minority interest in subsidiaries consist of the following:

	Year Ended December 31,
	1997	1996	1995
	(in thousands)
Domestic	$3,450	$1,361	$741
Foreign	61,563	18,999	5,361
Total	$65,013	$20,360	$6,102

The provision for income taxes consists of the following:
 

	Year Ended December 31,
	1997	1996	1995
	(in thousands)
Current:
U.S Federal	$2,243	$1,721	$525
U.S. State	329	228	41
Foreign	8,493	4,520	1,357
	11,065	6,469	1,923
Deferred:
U.S Federal	(569)	(258)	67
U.S. State	(92)	(47)	5
Foreign	3,584	(78)	(198)
	2,923	(383)	(126)
Total	$13,988	$6,086	$1,797

Deferred tax assets (liabilities) are comprised of the following:
 

	December 31,
	1997	1996
	(in thousands)
Net operating losses of foreign subsidiaries	$16,839	$11,405
Employee compensation not currently deductible	--	131
Inventory differences	(7,424)	(3,009)
Allowances for bad debts	1,115	1,788
Accruals not currently deductible	1,896	305
Other	27	(34)
	12,453	10,586
Valuation allowance	(13,676)	(11,006)
Total	$(1,223)	$(420)

The major elements contributing to the difference between taxes at the U.S. federal statutory tax rate and the effective tax rate are as follows:
 

	Year Ended December 31,
	1997	1996	1995
	(in thousands)
Income taxes at the United States statutory rate	$22,104	$6,922	$2,070
Foreign income subject to tax at other than statutory rate	(15,690)	(1,356)	(212)
State or local income taxes, less effect of federal benefits	156	168	55
Losses without tax benefit	5,127	1,329	613
Goodwill amortization	2,834	255	190
Utilizations of net operating losses of foreign subsidiaries	(759)	(1,196)	(826)
Other	216	(36)	(93)
Income taxes at the effective tax rate	$13,988	$6,086	$1,797

At December 31, 1997, the Company has net operating loss carryforwards in certain foreign jurisdictions that expire as follows:
 

2001	$4,474,000
2002	1,140,000
Thereafter	14,730,000
No expiration date	30,436,000
Total	$50,780,000

In assessing the realization of net operating loss carryforwards, management considers whether it is more likely than not that some portion or all of these net operating loss carryforwards will not be realized. The ultimate realization of these net operating loss carryforwards and other deferred tax assets are dependent upon the generation of future taxable income during the periods prior to the expiration of the operating loss carryforwards. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the operating loss carryforward periods, management believes it is more likely than not the Company will not realize the benefits of all of these net operating loss carryforwards and other deferred tax assets. Accordingly, a valuation allowance has been established since the full realization of such benefits was not likely. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of December 31, 1997 will be allocated to income from continuing operations or goodwill.

Note F--Notes Payable and Long Term Debt

Several of the Company's subsidiaries have short-term credit lines with local banks. As of December 31, 1997, the aggregate amount available under these agreements was $385.4 million, and $302.0 million was outstanding under these facilities. Generally, borrowings under such lines are collateralized by receivables or inventory. The lines are principally of one year duration and are renewable by the banks. Some of these lines contain restrictions on dividends to the parent company. In 1997, the maximum and average amounts outstanding were $395.2 million and $289.2 million, respectively. The weighted average interest rate at December 31, 1997 was 7.3.

The Company's long-term debt consists of the following:

	December 31,
	1997	1996
	(in thousands)
Two subsidiaries serving Latin America share a $60 million revolving credit agreement with a financial institution. The agreement, which expires October 1999, provides for advances and letters of credit based upon eligible accounts receivable and inventories. Interest is at a variable market rate based on the prime rate of the lender or LIBOR, at the borrower's option. All of the the borrowers' assets, including accounts receivable and inventories totaling $89.6 million at December 31, 1997, are pledged as collateral. The agreement contains certain restrictive covenants, including limitations on transactions with affiliated companies and employee loans. The agreement also limits the ability of these companies to pay dividends to the Company to 50 of the borrowers' net income.	$46,286	$34,374
Capitalized leases, collateralized by computer equipment, bearing interest ranging from 5 to 16 with maturities through September, 2002.	10,983	10,626
Mortgages on buildings, interest ranging from 5.9 to 9.0, with maturities through 2009, collateralized by a building with net book value at December 31, 1997 of $14.6 million.	6,114	2,455
Other notes, bearing interest of 5.9 at December 31, 1997, collateralized by inventories and accounts receivable totaling $54.9 million at December 31, 1997	5,204	--
Other debt	494	--
Total	69,081	47,455
Less current portion of long-term debt, included in notes payable	7,515	2,128
Total long-term debt	$61,556	$45,327

During November and December 1997, the borrowers were in violation of requirements to deposit funds in specific accounts pursuant to the $60 million revolving credit agreement. The lender has waived these violations.

Scheduled maturities of long-term debt are as follows (in thousands):
 

Year ending December 31,
1998	$7,515
1999	51,795
2000	5,095
2001	2,858
2002	968
Thereafter	844

Note G--Concentrations

The Company's operations are substantially all outside the United States. In 1997, the largest amount of sales occurred in Germany, which comprised 29 of total sales. The Company also had sales of almost 9 in each of France and England. While these countries are considered politically stable, there is risk that economic difficulties in any of these countries could adversely affect the Company's business. The Company also has operations in less politically stable countries.

Most of the Company's sales are made in local currencies other than the U.S. dollar in 1997. The largest amounts of sales were in German marks (29), French francs (10) and British pounds (9). In some countries, certain purchases and the resulting payables are in currencies (principally the U.S. dollar) different than the functional currency. Further, certain subsidiaries have loans receivable or payable denominated in currencies other than their functional currency. Transaction gains and losses on these receivables and liabilities are included in the determination of earnings for the relevant periods. In 1997, 1996 and 1995 foreign currency gains were $1,219,000, $1,559,000 and $74,000, respectively.

The Company enters into foreign exchange contracts to hedge groups of foreign currency transactions on a continuing basis for periods consistent with its committed exposure. The foreign exchange contracts are valued at market and generally have maturities which do not exceed six months. Gains and losses on foreign exchange contracts are intended to offset losses and gains on assets, liabilities and transactions being hedged. As a result, the Company does not anticipate any material adverse effect due to exchange rate movements over the short term period covered by these contracts. At December 31, 1997, the face value of foreign exchange forward contracts against trade payables was $104.9 million, which approximated the fair market value of the contracts. At December 31, 1997, approximately $271.6 million of accounts payable were attributable to foreign currency liabilities denominated in currencies other than the subsidiaries' functional currencies (principally $229.3 million in U.S. dollars and $26.2 million in German marks). The largest unhedged amounts of trade payables were in subsidiaries in Hong Kong, Czech Republic, Poland, Argentina and Mexico.

In some countries there are risks of continuing periodic devaluations or of large devaluations. In these countries, no hedging mechanism exists. The Company has risks in these countries that such devaluations could cause economic loss and negatively impact future sales since its product cost would increase in local terms after such devaluations. The Company attempts to limit its economic loss through structural mechanisms of limiting its holdings of local currency and receivables to the amount of its local currency payables.

The Company has a major supplier, Hewlett-Packard (HP), whose products accounted for 19, 34, and 35 and of sales for 1997, 1996 and 1995, respectively. No other vendor accounted for more than 10 of sales in any year except in 1996, in which one vendor was 12. HP has the right to terminate its distribution agreement with any Company subsidiary if the subsidiary is unable to cure, within a reasonable period of time, any violation of the agreement after having received notice from HP of the violation. Each Company subsidiary has the right to terminate the HP agreement on 90 days notice. Each Company subsidiary believes that its relationship with HP is good, and has no reason to believe that its distribution arrangement will not be a long-term relationship. No assurance can be given, however, that HP will renew each Company subsidiary's agreement at the time of its annual review or in subsequent years. Management has not formulated alternative plans of action in the event the HP contracts are terminated. The amounts outstanding to HP at December 31, 1997 and 1996 were $80 million and $70 million, respectively.

Note H--Lease Obligations and Other Contingencies

The Company leases equipment, offices, sales and warehouse space under non-cancelable leases. The following is a schedule by years of the minimum rental commitments remaining on leased property and equipment (in thousands) with terms greater than one year:

Year Ending December 31,	Total
1998	$12,416
1999	12,489
2000	11,625
2001	10,837
2002	4,305
Subsequent years	7,716

Total rental expense was $14,542,000, $6,715,000 and $2,503,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

Rental expense includes approximately $734,000 annually for monthly rent due on a CHS facility in Germany under a lease agreement dated November 1993 with a term of 17 years. CHS Germany has the option to purchase the leased property at both the end of the seventh year of the lease term, and at the end of the lease, for the net book value of the property as calculated under applicable German tax laws. The option prices at the end of the seventh and seventeenth year would approximate $5.6 million and $2.8 million, respectively. In addition, the lessor has the right to adjust the minimum rental payments at the end of 1999 if certain economic conditions prevail.

The Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is not currently engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company.

Note I--Related Party Transactions

A member of the Board of Directors and shareholder of the Company also serves as a member of the Board of Directors of a company which supplies product to the Company. This Company also has ownership interests in other companies which do business with the Company. Transactions with these related parties in 1997 were as follows (in thousands):
 

Sales to such related parties	$102,724
Purchases from such related parties	$57,376
Commissions paid to such related parties	$10,116
Rebates received from such related parties	$11,163

The rebates received pertain to vendor rebates passed from such related parties to the Company. The net amount of trade receivable due from such parties at December 31, 1997 was $12,193,000.

At December 31, 1997 and 1996, the Company carried a receivable from Comtrad and Comtrad Holdings, Inc. (CHI) in an amount of $17.4 million and $3.2 million, respectively. In 1997 this receivable is in the form of a promissory note which Comtrad and CHI has agreed to collateralize with 5,487,203 shares of CHS owned by Comtrad and CHI. Interest rate charged on the promissory note is at prime rate. The amount is due on demand. Interest charged to Comtrad was $684,000, $86,000 and $438,000 in 1997, 1996 and 1995, respectively. In 1995 the Company owed amounts to Comtrad which were subsequently extinguished. Interest paid to Comtrad was $126,000 in 1995.

In 1996, the Company purchased a company in Romania from Comtrad for $375,000. Subsequently, the Company loaned $800,000 to the subsidiary to enable it to purchase an office building. In December 1996, the Company sold this subsidiary back to Comtrad for the original purchase price plus an amount equal to the losses from April 1996 to date of sale ($200,000). No gain was recognized on the sale, which had the impact of increasing the amount due from Comtrad by $1.4 million.

In 1995 the Company billed Comtrad $495,000 for actual costs of salaries, space and other administrative costs it incurred on Comtrad's behalf. In 1995, Comtrad billed the Company $887,000 for the Company's share of actual costs incurred by Comtrad for salaries, space and other administrative expenses for shared employees.

A director of the Company served the Company as a management consultant under a consulting agreement specifying payments of $4,000 per month. The agreement was terminated at the end of 1996. In 1996 and 1995, $48,000 and $48,000, respectively, was paid under this agreement.

Note J--Common Stock and Stock Option Plans

In September 1997, the Board approved a 3 for 2 stock split. All share information has been restated to reflect all stock splits. In March 1996, the shareholders approved a reincorporation as a Florida company, a reverse 1 for 2 stock split and the authorization of 5,000,000 shares of preferred stock in such class or series and with such rights as approved by the Board of Directors. Under Florida law, a majority vote by the holders of the preferred stock as well as the holders of common stock is necessary to vote affirmatively on matters of mergers, sales of substantially all the Company's assets, exchanges of stock or changes in the articles of incorporation.

In August 1997, the Company completed a public offering of common shares in which the Company sold 21,208,134 shares and selling shareholders sold 1,216,866 shares. The Company's shares were sold at $21.17 per share which raised $428.2 million for the Company net of expenses and commissions.

In June 1996, the Company completed a public offering of common shares in which the Company sold 6,887,308 shares and selling shareholders sold 2,600,191 shares. The Company shares were sold at $8 per share which raised $50.6 million for the Company net of expenses and commissions. As part of the offering the underwriter received warrants entitling the purchase of 450,000 shares of stock in a 4 year period beginning in June 1997 at a price starting at $8.80 and increasing each year.

In August 1994, a Stock Incentive Plan was adopted by the Company's Board of Directors and subsequently approved by the Company's shareholders in June 1995. The maximum number of shares issuable under the Plan has been amended several times and is 2,620,500 at December 31, 1997. Certain of the grants (785,500 at December 31, 1997) are intended to qualify as incentive stock options and the remaining are non-qualified options. All options were issued with an exercise price equal to the market price and have a life of 10 years. Vesting periods are generally 25 a year for four years.

In 1997 the Board of Directors and subsequently the shareholders approved the Directors and Officers 1997 Stock Option Plan. The Plan authorizes options covering up to 1,350,000 shares of CHS Stock to be granted to executive officers and Directors. The options are to be granted at fair market value and generally vest over 3 years. In 1997, 1,275,000 options were granted under this Plan.

In 1997 the Board of Directors and subsequently the shareholders approved the 1997 CEO Stock Option Plan. The plan authorizes options covering up to 750,000 shares of CHS Stock to be issued to the CEO upon approval by the Board of a business acquisition. The options are granted at market value and vest based on the earnings of the acquired company. In 1997 all the options authorized by this plan were granted.

In June 1996, the Board of Directors, and subsequently the shareholders, approved the 1996 Chief Executive Officer Option Plan. The Plan provides for options covering up to 750,000 shares of CHS stock to be issued to the CEO upon the approval by the Board of Directors of a qualifying acquisition, as defined or of any acquisition if recommended by the Compensation Committee and approved by the Board. A qualifying acquisition is one where greater than 50 of the purchase price is comprised of common stock calculated by an earn out formula. The options are granted at market value and vest based on the earnings of the acquired company. In 1997 and 1996, all the options authorized by this plan were granted.

In December 1994, when the estimated fair value was $4.00, the Board granted the Company's Chief Executive Officer non-qualified options to purchase 84,120 shares for which the exercise price is $.67 per share. The vesting period was two years and the options expire in ten years. The compensation element of $280,400 has been amortized to compensation expense in the accompanying financial statements.

The Company accounts for its stock options under APB 25. No compensation cost has been recognized as the exercise price of each options does not exceed the fair value of the underlying stock at the date of grant. Had compensation cost for the plan been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net earnings per share would have been reduced to the pro forma amounts indicated below.

	1997	1996
Net earnings
As reported	$48,391,000	$12,166,000
Pro forma	44,362,000	11,777,000
Net earnings per share--basic
As reported	$1.44	$.80
Pro forma	1.32	.77
Net earnings per share--diluted
As reported	$1.32	$.78
Pro forma	1.21	.75

The fair value of each option grant is estimated on the date of grant using the Black-Scholes options pricing model with the following weighted-average assumptions used for grants in 1997 and 1996, respectively; dividend yield of 0 for each year; expected volatility of 67.9 in 1997 and 70 in 1996; risk-free interest rates ranging from 5.68 to 6.47 in 1997 and 6.06 in 1996; and expected lives of 4.5 years for each year.

A summary of the status of the Company's stock option plans as of December 31, 1997, 1996 and 1995 and changes during the years ending on those dates is presented below.
 

	1997		1996		1995
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
Outstanding at beginning of year	2,314,299	$8.01	846,132	$4.60	603,008	$3.53
Granted	3,191,381	18.09	1,583,720	9.75	334,500	6.39
Exercised	(705,469)	10.40	(61,611)	4.57	--	--
Cancelled	(182,398)	8.36	(53,942)	10.28	(91,376)	4.11
Outstanding at end of year	4,617,813	$15.17	2,314,299	$8.01	846,132	$4.60
Options exercisable at year end	1,095,037	$4.58	773,442	$5.89	208,283	$3.33
Weighted--average fair value of options granted during the year		$10.61		N/A		N/A

The following information applies to options outstanding at December 31, 1997:
 

Number outstanding	4,617,813
Range of exercise prices	$4.00-$25.46
Weighted-average exercise price	$15.17
Weighted-average remaining contractual life	9.2 years

Note K--Segment Information

The Company's business activities involve the operating segments of distribution of microcomputer equipment and software products. The operating segments are the distribution of universal products (products that represent the basic components of a personal computer without regard to the specific local language, regulatory and technical factors of individual markets) and localized products. The accounting policies of the segments are the same as those described in the Summary of Accounting Policies (Note A). The segments are managed separately since each requires different business and marketing strategies. The geographic areas in which the localized product segments operate are Western Europe, Eastern Europe and Latin America. Net sales, operating income (before interest and income taxes) and identifiable assets by segment were as follows (in thousands):
 

	Localized Products
	Western Europe	Eastern Europe	Latin America	Universal Products	Eliminations	Consolidated
1997
Net sales	$2,676,905	$389,553	$1,118,504	$571,421	$--	$4,756,383
Operating income	$42,867	$18,871	$17,891	$14,501	$--	$94,130
Corporate expenses						(4,969)
						89,161
Identifiable assets	$894,248	$189,918	$280,814	$472,689	$--	$1,837,669
Corporate assets						110,571
						$1,948,240
1996
Net sales	$1,063,997	$215,518	$576,025	$--	$--	$1,855,540
Operating income	$9,559	$11,440	$10,663	$--	$--	$31,662
Corporate expenses						(2,789)
						28,873
Identifiable assets	$528,568	$110,656	$207,734	$--	$--	$846,958
Corporate assets						14,991
						$861,949
1995
Net sales	$542,438	$65,320	$328,945	$--	$--	$936,703
Operating income	$7,358	$252	$3,934	$--	$--	$11,544
Corporate expenses						(745)
						10,799
Identifiable assets	$169,442	$33,283	$85,409	$--	$(22,677)	$265,457
Corporate assets						347
						$265,804

Note L--Subsequent Events

In January 1998, the Company implemented a Common Stock Purchase Rights Plan and distributed one right (a "Right") for each share of the Company's Common Stock outstanding. Each Right has an initial exercise price of $100 for one-one thousandth of a share of the Company's Series A junior participating preferred stock. The Rights are not exercisable or transferable, apart from the Company's Common Stock, until after a person or group acquires, or has the right to acquire, beneficial ownership of 15 or more of the Company's Common Stock (which threshold may, under certain circumstances, be reduced to 10) or announces a tender or exchange offer to acquire such percentage of the Company's Common Stock. Upon such occurrence, each Right (other than Rights owned by such person or group) will entitle the holder to purchase from the Company, or the particular acquiring person or group under certain circumstances and conditions, the number of shares of the Company's, or such person's or group's, Common Stock having a market value equal to twice the exercise price of the Right. The Rights are redeemable by the Company's Board of Directors under certain circumstances.

Note M--Summarized Quarterly Financial Data for 1997 and 1996 (unaudited)

	First Quarter	Second Quarter	Third Quarter	Fourth Quarter	Year
	(in thousands, except for per share information)
1997
Net sales	$877,103	$946,955	$1,097,567	$1,834,758	$4,756,383
Gross profit	62,463	70,173	84,944	129,089	346,669
Net earnings	6,710	6,401	11,436	23,844	48,391
Earnings per share--basic	.30	.29	.28	.49	1.44
Earnings per share--diluted	.29	.27	.26	.45	1.32
1996
Net sales	$302,995	$316,506	$376,209	$859,830	$1,855,540
Gross profit	22,542	23,764	27,109	57,693	131,108
Net earnings	1,988	1,726	2,325	6,127	12,166
Earnings per share--basic	.17	.14	.13	.33(A)	.80
Earnings per share--diluted	.16	.13	.11	.32	.78

(A) Results for the fourth quarter 1996 include a restructuring charge of $1.4 million ($1.1 million or $.07 per share after tax) for costs incurred by the Company to implement consolidation of its operations with acquired operations from Merisel.Report of Independent Certified Public Accountants
 

Report of Independent Certified Public Accountants

Board of Directors and Shareholders
CHS Electronics, Inc.

We have audited the accompanying consolidated balance sheets of CHS Electronics, Inc. as of December 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CHS Electronics, Inc. as of December 31, 1997 and 1996, and the consolidated results of its operations and its consolidated cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.

GRANT THORNTON LLP

Miami, Florida
March 12, 1998